Date: 19990903
Docket: 98-34-UI
BETWEEN:
YVON VAILLANCOURT,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] The Appellant is appealing a decision of the Minister of National Revenue (the "Minister") that he was not in an insurable employment with 3051633 Canada Inc. for the period from January 30, 1995 to January 12, 1996.
[2] The decision was rendered in application of paragraph 3(1)(a) of the Unemployment Insurance Act (the "Act").
[3] The facts relied on by the Minister are described at paragraph 7 of the Reply to the Notice of Appeal (the "Reply") as follows:
(a) prior to the period in question, the Appellant and Louis Joly were equal shareholders in Custom Door & Specialty (1987) Ltée, specialized in the installation of doors and windows;
(b) Custom Door & Specialty (1987) Ltée ceased to operate in October 1994;
(c) at all material times, the Appellant's spouse was Lisette Lafrance;
(d) at all material times, Louis Joly's spouse was Monique Robillard;
(e) in July 1994, Lisette Lafrance and Monique Robillard incorporated and became the sole shareholders of the Payor's business;
(f) the Payor's business was specialized in the installation of doors and windows;
(g) Lisette Lafrance and Monique Robillard had no expertise in the Payor's business;
(h) the Appellant and Louis Joly were hired by the Payor to operate the Payor's business;
(i) the Appellant was looking after the construction sites and Louis Joly was taking care of the administrative tasks;
(j) the Appellant and Louis Joly were responsible for all the business decisions (operational, administrative and financial);
(k) the Appellant was not supervised by the Payor;
(l) the Appellant was not controlled in any way by the Payor;
(m) the Appellant and Louis Joly had signing authority for the Payor;
(n) the Appellant's rate of pay was $40,000 per year paid on a weekly basis;
(o) the Appellant and Louis Joly ran the Payor's business as if it was their own business;
(p) there was no contract of service between the Appellant and the Payor;
(q) the Appellant was not employed by the Payor pursuant to a contract of service.
[4] The Appellant, in support of that he was in an insurable employment, relied on the facts described at paragraph 5 of the Notice of Appeal as follows:
A. The Employer was at all times a separate legal entity from the Appellant. The Employer was incorporated on July 14, 1994 by Lisette Lafrance and Monique Robillard who served as the sole directors and sole shareholders of the corporation.
B. Shareholders meetings were held and financial statements produced on behalf of the corporation.
C. The corporation employed approximately twelve to fourteen employees, all full-time, in addition to the Appellant.
D. The business of the Employer was year-round and did not represent seasonal employment.
E. The Appellant was employed pursuant to an oral agreement fixing not only the duties he was required to perform, but also his hours of work, rate of remuneration, method of payment, vacation time, and exclusivity of employment.
F. The Appellant's duties included the initial breakdown of construction plans received from contractors. The Appellant was required to review such plans and to determine the required number and size of doors, baseboards and casing, and was responsible for taking all measurements in relation to such. The Appellant was further responsible for inspecting the work of sub-contractors, and was occasionally required to carry out minor repair work as well.
G. Approximately sixty percent of the Appellant's work was carried out in the field at locations directed by the Employer, primarily taking measurements, checking moulding and inspecting the work of sub-contractors. The remaining forty percent of the Appellant's work took place at the Employer's offices, mainly reviewing and breaking down construction plans received from contractors.
H. All major decisions taken by the Appellant with respect to the business of the Employer were subject to the approval of corporation. The Appellant was not free to vary his hours of work nor did he have the authority to make decisions respecting the ownership of the corporation.
I. The Appellant's hours of work were determined by the corporation. The Appellant was required to work from 7:30 a.m. to 5:00 p.m., with a one-hour break for lunch, from Monday to Friday, for a total of 42½ hours per week.
J. The Appellant was not free to determine his vacation periods, and was required to obtain the authorization of the corporation for such.
K. The Appellant's rate of pay, payment schedule and method of payment were all determined by the corporation. The Appellant was paid approximately $750 per week, in bi-monthly instalments, by corporate cheque.
L. All applicable deductions including QPP, UI and Income Tax were regularly deducted from the Appellant's remuneration.
M. Tools used by the Appellant in his employment such as miter saws, coping saws, cordless drills and tape measures were all owned by the corporate Employer.
N. The Appellant was fully reimbursed for expenses incurred in the performance of his duties for the Employer, upon providing the Employer with invoices for such.
O. The Appellant was required to work full time for the Employer and was not free to engage in additional employment at such time.
P. The Appellant departed from the employer's employ due to the corporation's decision to take on an additional owner. The Appellant was unable to convince the corporation not to take this decision, and lacked the decision-making power to prevent it from doing so.
Q. Approximately one month following the Appellant's departure from the corporation, the Employer hired another individual to replace the Appellant and take on his primary responsibilities.
[5] The Appellant testified. A book of documents comprising Exhibits A-1 to A-7 was produced. Ms. Marie-Paule Germain, Appeals Officer at Revenue Canada, testified for the Respondent.
[6] The operational aspects of this case are well described in the Notice of Appeal and the Reply. There is no dispute on that aspect. There would be a dispute as to how the corporate control was exercised although there was scant if not no evidence given by the Appellant on how the corporate control was exercised by the wives as shareholders and neither wives came to testify. The argument weighed mostly on the existence of the corporate body being distinct from that of the workers. Although there is a mention in subparagraph 5(B) of the Notice of Appeal, that there were shareholders meetings, there was no evidence adduced by the Appellant to this effect.
[7] The Appellant admitted subparagraphs 7(a) to 7(k) and 7(n) of the Reply. Respecting subparagraph 7(n) of the Reply, the Appellant corrected it to state that he received his salary on a bi-weekly basis.
[8]Ms. Germain related that she spoke with the wives of Louis Joly and the Appellant, who were the shareholders, and both told her that their husbands decided everything and that they had nothing to do with the business of the corporation. For example, it was not the wives, as shareholders, who decided the salary of both Mr. Vaillancourt and Mr. Joly but the latter themselves. The Appellant's wife stated to Ms. Germain that she typed at night for the corporation in the same manner as she used to do for Custom Door & Specialty (1987) Ltée referred to in subparagraphs 3(a) and 3(b) of the Reply. The Appellant and his partner continued to act in the same manner as they were acting in Custom Door & Specialty (1987) Ltée. The Appellant looked after the construction site and Mr. Louis Joly after the administrative tasks. Both were responsible for all the business decisions (operational, administrative and financial).
[9] In the financial statements produced as Exhibit A-2, page 4, entitled: "Résultats", the salary of both the Appellant and Mr. Vaillancourt is shown as being the salary of the directors. There was a mention in the Notice of Appeal that the corporation had employees but no salary of employees is shown in the financial statements. I have to assume that the workers worked in the capacity of contractors because there is an amount shown for "Travaux à forfait" in the financial statements.
[10] In these financial statements on the page entitled "Notes complémentaires", it is shown that the Appellant, Mr. Joly and their two wives have cautioned a loan of $30,000 made by Mr. Ernie Charlebois for the purchase of the equipment.
[11] Counsel for the Appellant referred to the decision of this Court in Duchesne v. Canada [1995] T.C.J. No. 73. As in my view, the aspect of control by the corporation over the workers is one of the conditions of a contract of employment that is missing in this appeal, I will quote the passages pertinent to that aspect in the above-mentioned decision, at paragraphs 37 to 41, and 53 to 58 and 61 (pages 9, 10, 12, 13 and 14 of the official translation):
[TRANSLATION]
It is appropriate here to reproduce a passage from Andréa Landry Sexton rendered in 1991 by Hugessen, Desjardins and Décary J.J.A. of the Federal Court of Appeal[1] in which four shareholders in that case had respectively held 17 per cent, 17 per cent, 33 per cent and 33 per cent of the company's voting shares. The Minister apparently found that the employment held by the applicants was not insurable, relying at the time on paragraph 14(a) of the Unemployment Insurance Regulations ("the Regulations") which read at the time as follows:
14. The following employments are excepted from insurable employment:
(a) employment of a person by a corporation if he or his spouse, individually or in combination, controls more than forty per cent of the voting shares of that corporation;
The judges of the Federal Court of Appeal ruled as follows:
In my view, the judge made an error of law in considering only the administrative or operational control of the company. What the regulatory provision speaks of is 40 per cent control of the voting shares of the company, which is not at all necessarily the same thing.
...
Determining the control of voting shares in a company is a mixed question of law and fact. To begin with, it must be determined who is the holder of the shares; then, the question is whether there are circumstances interfering with the holder's free and independent exercise of his voting right. and if applicable, who may legally exercise that right in the holder's place.
A person who has administrative or operational control of a company does not necessarily control its shares; in fact, it often happens in the modern business world that those responsible for managing a company have few of its shares or none at all.
In the case at bar the Tax Court of Canada judge concluded that the applicants, who each held 17 per cent of the company's voting shares, actually controlled it. While this conclusion may be correct it in no way determines the control of voting rights to the 33 per cent of the shares held by each of the applicants' children. As the judge himself said, Michel and Charlène Sexton "were owners and held the de jure power to control the new company", and there is no basis in the evidence for concluding that they ever gave up their voting rights to the shares owned by them or in any way interfered with the free exercise of that right.
Did the respondent prove in the instant case that the other two shareholders, each holders of 33 per cent of the payer's voting shares, had likely been or were prevented from exercising their voting rights?
The Court does not believe so. The appellant's "de jure" power cannot be attacked by mere claims to that effect. Clear proof that 40 per cent of the voting shares were actually held by the appellant would have been necessary. It was not made. Control over the day-to-day and operational management of the company differs from the control which the shareholders derive from their voting rights.
Lastly, Hugessen J.A. concluded:
The Minister's position was based solely on s. 14(a) of the Regulations, and not in any way on allegations of sham or fraud. In these circumstances, and in view of the absence of any evidence that Michel Sexton and Charlène Sexton did not have free exercise of the voting right to the shares held by them, the Tax Court of Canada judge could not do other than allow the applicants' appeals and find that each of them held insurable employment during the period at issue.
...
The Tests
The four basic tests recognized by the case law in evaluating a contract of service are well known:
(1) control;
(2) integration of the employee into the employer's business;
(3) ownership of the tools;
(4) chance of profit and risk of loss.
Only the first and last of these tests will be considered, the other two posing no problem in this case.
Control
The appellant testified that he was controlled by his son and that his son was controlled by him (3.09).
As we have stated on many occasions, the degree of control varies with the circumstances and depends to a large degree on the nature of the work to be performed as well as the worker's expertise.
The appellant in this case worked three days a week and his son four days, always at the same places of work. Since each was confronted with the work done by the other, the mutual control to which the appellant testified was more than plausible in the circumstances. Moreover, Pierre Sirois Inc. also controlled all the work performed, including that of the payer's employees (3.09).
Moreover, even if the evidence had shown that the appellant was under no form of control by his son or Pierre Sirois Inc., the principles arising from Lee v. Lee's, supra, (4.02.4) [in fine] would have satisfied the requirement of control over the appellant in this case.
Lord Morris of Borth-y-Gest stated at page 425:
The fact that so long as the deceased continued to be governing director, with amplitude of powers, it would be for him to act as the agent of the respondent company to give the orders does not alter the fact that the respondent company and the deceased were two separate and distinct legal persons. If the deceased had a contract of service with the respondent company, then the respondent company had a right of control. The manner of its exercise would not affect or diminish the right to its exercise. But the existence of a right to control cannot be denied if once the reality of the legal existence of the respondent company is recognised. Just as the respondent company and the deceased were separate legal entities so as to permit of contractual relations being established between them, so also were they separate legal entities so as to enable the respondent company to give an order to the deceased.
(The emphasis is mine.)
In other words, the payer in this case, a person distinct from the appellant, could control the work performed by the latter. The appellant, in performing the work described above (3.01), was acting under the payer's direction.
...
The respondent contended in this case that the incorporation was merely a stratagem planned by the appellant for the purpose of drawing unemployment insurance benefits. The Court has concluded as to the true nature of the legal relationship between the parties and that the appellant was entitled in the circumstances to organize his affairs so as to receive unemployment insurance benefits.[2]
[12] I agree with Counsel for the Appellant that the Court has to take into account the legal entity of the Payor which is a corporation. However, the Court has to analyse whether this entity exercised control over the workers.
[13] The allegation that the shareholders did not exercise any power of control over the workers was stated in the Reply to the Notice of Appeal and in this regard was in conformity with the decision of the Federal Court of Appeal in Landry, Sexton v. M.N.R., May 10, 1991 (referred to before in the Duchesne decision), that stated that if a decision of the Minister is based on the fact that the corporation did not exercise control over the workers, that allegation should be made in the Reply.
[14] I believe it is also useful to refer to the comments of Marceau J.A. of the Federal Court of Appeal in Scalia v. M.N.R. (May 19, 1994) on the aspect of the employment relationship between the corporation and the appellant:
On analysing the evidence, however, we find that the applicant had such ascendancy over the company, its activities and the decisions of its board of directors, which was composed of himself, his nephew and his sister-in-law, that there could not have been the independent relationship between himself and the company that is necessary to the creation of a true subordinate relationship. It would perhaps have been easier for the judge to refer, as did the Minister, to the exception that was in force at the relevant time under paragraph 14(a) of the Regulations, as interpreted and applied by the courts, but ultimately the judge’s approach was not in error, since the control that a corporation which is an employer may exercise over the person who completely dominates it is more fictitious than real (as Parliament confirmed in 1990 when it enacted the new paragraphs 3(2)(c) and (d) of the Act).
[15] In the case at bar, as in Scalia, the evidence did not show that there was between the corporation and the Appellant an independent relationship which would indicate the existence of a relationship of subordination between the corporation and himself. The corporate body did not have a mind distinct from the one of the two workers. The shareholders stated to the Appeals Officer that they took no decision, the workers did. There was no evidence that they did any managing or took any decision with respect to the corporation. The Court can only conclude, with respect to the corporation’s shareholders, that they acted only as nominees for the workers and that no control was exercised by the corporation over the workers.
[16] Consequently, the alleged employment was not an insurable employment within the meaning of the Act.
[17] The appeal is dismissed.
Signed at Ottawa (Canada), this 3rd day of September 1999.
“Louise Lamarre Proulx”
J.T.C.C.